Chinese apparel production

84 Pages·2016·2.19 MB·English

by  Johanna Edman

Chinese apparel production- where to next?
A case study of a sportswear MNE relocating production out of Eastern China

Department of Business Administration
International Business
Bachelor Thesis
Spring 2016

Authors:
Johanna Edman
Johanna Krüger

Tutor:
Curt Nestor
Johanna Edman
Johanna Krüger
Bachelor Thesis 2016
Acknowledgements
We would like to thank the top management of our investigated apparel MNE who decided to
participate in our case study. By allowing us to conduct interviews and readily answer to our
questions about the relocation process and determinants when moving production in East
Asia, we have been able to fulfill the purpose of this report and gain increased knowledge
about a current phenomenon affecting the Chinese business climate.

Finally, we would like to thank our tutor Curt Nestor for guiding us in this process and for the
important knowledge he has provided us with.

Gothenburg, 2016-06-03

Johanna Edman Johanna Krüger

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Johanna Krüger
Bachelor Thesis 2016
Abstract
Abstract
Background and problem: China has over the past decades been considered the world’s
factory with low production costs and an abundance of low-cost labor. As a result, many
foreign firms have located their low cost manufacturing in the country. However, the former
cheap production hubs are becoming increasingly expensive, especially in Eastern China.
Subsequently, many apparel companies and suppliers located in East China are now looking
for cheaper production either inland or in nearby East Asian countries. This study focuses on
a multinational Scandinavian anonymous sportswear company located in Shanghai and their
process and reasons for relocating parts of their production in order to stay competitive in the
apparel market.

Purpose: The purpose of this study is to increase the understanding of where foreign apparel
manufacturing firms decide to relocate production when moving out of Eastern China. It
focuses on the key factors behind this decision and how well the selected MNE (Multinational
Enterprise) motives correspond to the identified determinants.

Method: A qualitative method has been used to collect empirical evidence and analyzing the
empirical data. It has been conducted through a single case study based on interviews with the
top management of the selected company in Shanghai.

Results and conclusions: The selected MNE has chosen to relocate parts of their production
by following an existing supplier to Myanmar. Combinations of fluctuating exchange rates,
relationships, incentives to spread risks and reduced tariffs have been identified as key drivers
behind the decision.

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Bachelor Thesis 2016

Table of content

1. Introduction ........................................................................................................................................ 7

1.1 Background
 .................................................................................................................................................................
 7

1.2 Problem discussion
 ...................................................................................................................................................
 8

1.3 Purpose of the thesis
 .............................................................................................................................................
 10

1.4 Research question
 ..................................................................................................................................................
 10

1.5 Limitations of the thesis
 .......................................................................................................................................
 11

2. Theoretical framework .................................................................................................................... 12

2.1 The OLI paradigm
 .................................................................................................................................................
 12

2.2 Determinant-model: Relocating production
 ..................................................................................................
 14

2.3 Model: Geographical relocation strategies
 ....................................................................................................
 28

2.3.1 Go Out
 ...............................................................................................................................................................
 29

2.3.2 Go West
 ............................................................................................................................................................
 30

2.3.3 Alternative strategies
 ....................................................................................................................................
 31

3. Methodology ..................................................................................................................................... 32

3.1 Research approach- Qualitative approach
 .....................................................................................................
 32

3.2 Research Method- Qualitative, single case study
 ........................................................................................
 33

3.3 Scientific approach
 ................................................................................................................................................
 34

3.4 Theoretical framework collection
 .....................................................................................................................
 34

3.5 Empirical material collection
 .............................................................................................................................
 35

3.5.1 Interviews as an empirical research method
 .........................................................................................
 36

3.5.2 Background to the interview questions
 ..................................................................................................
 38

3.5.3 Recording and Transcription
 .....................................................................................................................
 38

3.6 Method for empirical material analysis
 ..........................................................................................................
 39

4. Empirical Evidence .......................................................................................................................... 40

4.1 Current production facilities & networks
 .......................................................................................................
 40

4.2 Key determinants behind the relocation decision
 ........................................................................................
 42

4.3 Decision making process
 .....................................................................................................................................
 43

4.4 The sourcing process
 ............................................................................................................................................
 44

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Johanna Krüger
Bachelor Thesis 2016
4.5 Quality assurance & Inspections
 .......................................................................................................................
 45

4.6 The new factory in Myanmar
 .............................................................................................................................
 46

4.7 Trends within the sportswear industry according to respondents
 ..........................................................
 47

4.8 Summary of empirical findings- Determinants
 ............................................................................................
 48

4.9 Myanmar’s textile industry
 .................................................................................................................................
 49

5. Analysis ............................................................................................................................................. 50

5.1 OLI-paradigm
 ..........................................................................................................................................................
 51

5.2 Determinants
 ............................................................................................................................................................
 54

5.3 Geographical relocation strategies
 ...................................................................................................................
 63

6. Conclusion ........................................................................................................................................ 65

6.1 Conclusions of the thesis
 .....................................................................................................................................
 65

6.2 Suggestions for future research
 .........................................................................................................................
 67

6.3. Implications for practitioners
 ............................................................................................................................
 67

8.1 Original Model: Restructuring strategies adopted by the export-oriented apparel firms. Pearl
River Delta, PRD; Yangtze River Delta, YRD
 ...................................................................................................
 81

8.2 Interview questions
 ................................................................................................................................................
 82

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Bachelor Thesis 2016
Key words
Relocation, production, apparel industry, MNE, China, East Asia, sourcing.

List of Abbreviations & Definitions
FDI- Foreign Direct Investment
FOB- Free On Board Shipping Point
FTA- Free Trade Agreement
HRM- Human Resource Management
MFA- Multi Fibre Agreement
MNE- Multinational Enterprise
NGO- Non-governmental Organization
NIE- Newly Industrialized Economies
NOK- Norwegian Krone
PRD- Pearl River Delta
RMB- Renminbi (Chinese currency).
Trims- Materials used to ornament or enhance garments. Often combined with accessories.
SME- Small Medium Enterprises
YRD- Yangtze River Delta

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1. Introduction

This section aims to provide the reader with a background of China’s current economic
slowdown and insight into why MNE’s have started to look outside of China alternatively
towards Central-Western China when relocating manufacturing. It is followed by a problem
discussion, purpose of the study, research question and limitations. In addition, the thesis
structure is presented in order to give the reader a clear overview of the study and its sections.
1.1 Background

Since the 1970s, China has emerged from a secluded and politically unstable country into a
major global economic player (Hägerdal, 2008). The country has over the past decades
experienced dramatic economic growth fueled by separate reforms. The combination of
increasing international demand and internal reforms has contributed to a rapid development
of the private sector, which in turn has resulted in China emerging as one of the most
prominent actors within the global manufacturing market (Pickles & Zhu, 2014). China’s
status as a world factory accelerated through their entrance into the World Trade Organization
in 2001. In 2011, China overtook the U.S. as the world's largest producer of manufactured
goods (Eloot et al., 2013; WTO, 2016a). The emergence of China as a key exporter has
mainly relied on its ability to provide unskilled or semi-skilled labor, industrial clusters and
low wages. Until recently the primary economic activity has been located in the Eastern
coastal regions of the country as a result of low wage employment. However, as the
competitive pressures and the production costs have started to rise in this region, the Chinese
business environment has undergone major transformations (Pickles & Zhu, 2014). China is
the biggest clothing exporter (WTO, 2015), nevertheless the growth in apparel exports for
smaller Asian countries such as Vietnam and Bangladesh has increased much more than in
China over the past few years (WTO, 2013).

Since the beginning of the 21st century, an increasing amount of factories located in the
Eastern coastal areas have experienced difficulties related to increased economic and social
costs. This has forced manufacturers and producers to relocate low-skilled manufacturing
operations. The apparel industry in China, regarded as a low-skilled industry, is a case in
point of how the reconstructions have affected the business environment and altered the
outlook of the industry. The rise of China’s export-oriented apparel industry has largely been
driven by the opportunity of utilizing advantages linked to a specific location such as low
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Bachelor Thesis 2016
wages and preferential national regulations (He & Zhu, 2013). These location strategies are
now used in order to find more competitive areas for production towards Central-Western
China or abroad (Zhu & Pickles, 2014).
1.2 Problem discussion

MNE’s that continue to base their manufacturing strategies solely on China's reputation as the
“world’s factory” are in for a surprise. Current research debates whether China will be able to
maintain its dominant position on the global market since recent reports are showing an
decrease in FDI (Foreign Direct Investments) into China’s manufacturing sector, as Figure 1
reveals (KPMG, 2015).

Figure 1. China’s inward FDI breakdown by industry, 2010-2014

Note: “Others” refer to the following sectors: agriculture, fishery, forestry etc.
Source: KPMG, 2015.

Manufacturing wages in China have increased with an average of 12% per year since 2001. In
addition, China’s currency is considered being at an all-time high, making it increasingly
expensive for the world to purchase Chinese produced goods (Economist, 2015). FDI has
been concentrated into the Eastern coastal regions, which has caused unequal regional
development (Zheng & Chen, 2007). As a result, it is becoming harder for apparel
manufacturers to find low cost factory workers for their clothing production in this area. As
shown in Figure 2, Eastern Coastal China is by far containing the largest share of middle
class. However, this is expected to change over time (Barton et al., 2013).

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Johanna Krüger
Bachelor Thesis 2016

Figure 2. The shifting geographic center of middle-class growth

Source: Barton et al., 2013.

A decline of the general importance of manufacturing in the Eastern areas has resulted in the
loss of new factory investments to low-cost locations such as Central-Western China,
Vietnam, Indonesia, Cambodia and Myanmar. In addition, evidence suggests that the
manufacturing rate is decreasing quicker than the aggregated economic growth, which
supports the fact that manufacturing in China is overall becoming less significant (Berg et al.,
2013). MNEs are starting to adapt their strategies by relocating production to areas where
labor and production costs are cheaper (ChinaDaily, 2010). However, relocating production is
a complicated and time-consuming process, which may take months or even years to
implement (Pauly, 2016).

In addition, companies today compete on an international market with other strong global
brands and actors. It is therefore crucial that companies strive towards developing and
improving the integration of their global value chains. Alternative approaches must be
considered by policymakers in order to make strategic decisions that are promising for future
business. In recent years MNEs have shown a tendency to increase their use of suppliers for
production, a phenomenon known as externalization. The overall usage of non-equity modes
of international production, such as contract manufacturing, franchising, licensing,
management contracts and services outsourcing are becoming increasingly common when
companies decide to expand internationally or relocate within the apparel industry
(UNCTAD, 2011). One of the most frequently used non-equity modes is contractual
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Bachelor Thesis 2016
agreements as it requires less commitment from a company when moving into foreign
markets. Subcontractors are also frequently used in production within the apparel industry
(Dicken, 2014; Hill, 2011). Non-equity modes of production is becoming more significant
worldwide, especially for developing economies since it may enhance the productive
capacities. It also helps shape global patterns through linking international trade and FDI
through integrating global value chains of companies worldwide. However, non-equity modes
may also pose certain risks. For instance, employment in contract manufacturing can be easily
displaced and highly cyclical (UNCTAD, 2011).

This study is a contribution to the research of the phenomenon where companies decide to
utilize non-equity modes of internationalization as it presents an example of a multinational
Scandinavian sportswear MNE hereinafter referred to as company A, that not only utilizes
contract manufacturing but also uses a subcontractor as an intermediary for their decision to
relocate production. The company, which has had a major part of its sportswear production
located in the Eastern coastal regions of China, has decided to relocate some of their
manufacturing activities to Myanmar due to increased production costs. The reason behind
the company’s wish to remain anonymous is related to the confidential nature of the
information provided by the company.
1.3 Purpose of the thesis

The purpose of this thesis is to investigate and contribute to an understanding of how foreign
apparel MNEs with manufacturing in Eastern China have adapted to the changing
environment by relocating production through utilizing contract manufacturing and
subcontractors by focusing on the underlying key determinants. This purpose is fulfilled by
conducting a case study on a Scandinavian sportswear company active in China, which is in
the process of relocating production out of Eastern China to Myanmar.
1.4 Research question

Which are the key determinants for MNEs to relocate production?

Sub-questions guiding the direction of this study in order to fulfill the purpose of gaining
increased understanding of a current phenomenon:

• What strategy/strategies may MNE’s adopt in order to relocate production?
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